AMERICAN HEART ASSOCIATION, INC. Financial Statements. June 30, (With Independent Auditors Report Thereon)

Transcription

1 Financial Statements (With Independent Auditors Report Thereon)

2 KPMG LLP Suite Ross Avenue Dallas, TX Independent Auditors Report The Board of Directors American Heart Association, Inc.: Report on the Financial Statements We have audited the accompanying financial statements of the American Heart Association, Inc. (the Association), which comprise the statements of activities, functional expenses, and cash flows for the year ended, the related balance sheet as of, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the American Heart Association, Inc. as of, and the changes in its net assets and its cash flows for the year then ended in accordance with U.S. generally accepted accounting principles. KPMG LLP is a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity.

3 Report on Summarized Comparative Information We have previously audited the American Heart Association Inc. s 2017 financial statements, and we expressed an unmodified audit opinion on those audited financial statements in our report dated October 27, In our opinion, the summarized comparative information presented herein as of and for the year ended June 30, 2017 is consistent, in all material respects, with the audited financial statements from which it has been derived. October 26, 2018

4 Statement of Activities Year ended (with summarized comparative totals for the year ended June 30, 2017) (In thousands) Temporarily Permanently Unrestricted restricted restricted Total Total Revenue: Public support: Contributions $ 71, , , ,810 Contributed services and materials 41,799 41,799 60,163 Special events 283,600 87, , ,728 Less direct donor benefits (46,727) (46,727) (43,912) Bequests 57,690 22, ,711 72,511 Split-interest agreements ,243 Federated and nonfederated fund-raising organizations 2, ,284 3,005 Total public support 410, , , ,548 Other revenue: Program fees 38,309 38,309 31,323 Sales of educational materials 146, , ,140 Membership dues 5,228 5,228 4,398 Grants from government agencies 5,068 5,068 8,142 Interest and dividends, net of fees 9, ,330 11,097 Net realized and unrealized gains on investments 33,704 4,079 37,783 51,030 Perpetual trust distributions 5,545 1,446 6,991 6,810 Net unrealized gains on beneficial interest in perpetual trusts 5,668 5,668 4,914 Change in value of split-interest agreements (427) 5, ,943 7,298 Royalty revenue 19,126 19,126 18,866 Miscellaneous revenue (losses), net 7,741 (4,452) 3,289 4,421 Total other revenue 269,748 7,315 5, , ,439 Net assets released from restrictions: Satisfaction of purpose restrictions 116,616 (116,616) Expiration of time restrictions 89,838 (89,831) (7) Total net assets released from restrictions 206,454 (206,447) (7) Total revenue 887,109 39,578 6, , ,987 3 (Continued)

5 Statement of Activities Year ended (with summarized comparative totals for the year ended June 30, 2017) (In thousands) Temporarily Permanently Unrestricted restricted restricted Total Total Expenses: Program services: Research to acquire new knowledge through biomedical investigation by providing financial support to academic institutions and scientists $ 183, , ,676 Public health education to inform the public about the prevention and treatment of cardiovascular diseases and stroke 303, , ,872 Professional education and training to improve the knowledge, skills, and techniques of health professionals 166, , ,734 Community services to provide organized training in emergency aid, blood pressure screening, and other community-wide activities 77,954 77,954 74,366 Total program services 731, , ,648 Supporting services: Management and general to provide executive direction, financial management, overall planning, and coordination of the Association s activities 51,229 51,229 58,914 Fundraising to secure financial support from the public 107, , ,543 Total supporting services 159, , ,457 Total program and supporting services expenses 890, , ,105 Change in net assets before postretirement changes other than net periodic benefit cost (3,412) 39,578 6,470 42,636 18,882 Postretirement changes other than net periodic benefit cost (29) Change in net assets (2,513) 39,578 6,470 43,535 18,853 Net assets, beginning of year 375, , , , ,410 Net assets, end of year $ 373, , , , ,263 See accompanying notes to financial statements. 4

6 Statement of Functional Expenses Year ended (with summarized comparative totals for the year ended June 30, 2017) (In thousands) Public Professional Subtotal Subtotal health education/ Community program Management supporting Research education training services services and general Fundraising services Total Total Salaries, taxes, and benefits $ 7, ,721 51,624 33, ,702 35,060 64,307 99, , ,644 Awards and grants 159,153 5,016 2,129 5, , , ,683 Occupancy 48 11,076 1,463 1,862 14,449 1,535 2,952 4,487 18,936 17,921 Printing and publication 26 37,883 46,194 16, ,559 2,156 10,582 12, , ,926 Conferences, meetings, and travel 1,791 15,229 23,077 4,521 44,618 4,579 8,683 13,262 57,880 60,737 Professional fees 14,434 23,767 32,193 11,058 81, ,977 8,523 89,975 90,744 Other operating expenses ,966 7,579 4,029 35,472 6,308 11,426 17,734 53,206 53,955 Depreciation and amortization 437 6,786 1,801 1,109 10,133 1,045 2,033 3,078 13,211 12,495 Total functional expenses before direct donor benefits 183, , ,060 77, ,332 51, , , , ,105 Direct donor benefits 46,727 43,912 Total functional expenses and direct donor benefits $ 183, , ,060 77, ,332 51, , , , ,017 See accompanying notes to financial statements. 5

7 Balance Sheet (with comparative amounts for June 30, 2017) (In thousands) Assets Cash and cash equivalents $ 64,917 45,720 Investments 732, ,035 Receivables: Pledges, net 272, ,766 Exchange transactions 16,176 17,113 Other 11,593 18,947 Bequests 14,083 14,979 Split-interest agreements, net of discount 70,837 72,222 Prepaid expenses and other assets 15,242 19,922 Beneficial interest in perpetual trusts 147, ,918 Land, buildings, and equipment, net 66,701 67,487 Total assets $ 1,412,916 1,364,109 Liabilities and Net Assets Liabilities: Accounts payable and accrued expenses $ 76,075 71,251 Deferred revenue 10,606 9,817 Research awards payable 340, ,983 Other liabilities 33,905 34,795 Total liabilities 461, ,846 Net assets: Unrestricted: Available for research, program, and supporting activities 306, ,466 Investment in land, buildings, and equipment 66,701 67,487 Total unrestricted 373, ,953 Temporarily restricted 384, ,111 Permanently restricted 193, ,199 Total net assets 951, ,263 Total liabilities and net assets $ 1,412,916 1,364,109 See accompanying notes to financial statements. 6

8 Statement of Cash Flows Year ended (with comparative amounts for the year ended June 30, 2017) (In thousands) Cash flows from operating activities: Change in net assets $ 43,535 18,853 Adjustments to reconcile change in net assets to net cash used in operating activities: Depreciation and amortization 13,211 12,495 Net realized and unrealized gains on investments (37,783) (51,030) Net unrealized gains on beneficial interest in perpetual trusts (5,668) (4,914) Change in value of split-interest agreements (4,943) (7,298) Gains on sale of fixed assets (2,060) (1,023) Losses on uncollectible accounts and settlement of receivables 5,590 4,252 Contributions to endowment (717) (53) Changes in operating assets and liabilities: Receivables (39,532) (28,330) Prepaid expenses and other assets 4,680 1,999 Beneficial interest in perpetual trusts (19) Split-interest agreements 6,506 1,500 Accounts payable and accrued expenses 4,824 (6,129) Deferred revenue Research awards payable ,410 Other liabilities (1,331) 1,043 Net cash used in operating activities (12,351) (33,512) Cash flows from investing activities: Purchases of fixed assets (13,904) (11,382) Proceeds from sale of fixed assets 4,437 2,390 Purchases of investments (159,331) (278,666) Proceeds from sales/maturities of investments 200, ,426 Net cash provided by (used in) investing activities 31,464 (1,232) Cash flows from financing activities: Payments on mortgage notes payable and capital leases (636) (1,199) Contributions to endowment Net cash provided by (used in) financing activities 81 (1,146) Net increase (decrease) in cash and cash equivalents 19,194 (35,890) Cash and cash equivalents, beginning of year 45,720 81,610 Cash and cash equivalents, end of year $ 64,914 45,720 Supplemental cash flow information: Interest paid $ Taxes paid Contributed services and materials 41,799 60,163 Equipment purchased by capital lease See accompanying notes to financial statements. 7

9 (1) Organization and Summary of Significant Accounting Policies (a) Organization The American Heart Association, Inc. (the Association or AHA) has as its mission to be a relentless force for a world of longer, healthier lives. The Association provides funding for cardiovascular and stroke research, public health education, and community services programs that inform the general public about what they can do to prevent heart disease and stroke, and for professional education programs that help healthcare professionals prevent, detect, and treat cardiovascular diseases and stroke. The Association s principal source of revenue is money contributed by the general public. (b) Basis of Presentation The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (GAAP). The financial statement presentation follows the provisions of the Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) 958, Not-for-Profit Entities. Under FASB ASC 958, the Association is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. Net assets, revenues, gains, and losses are classified based on the existence or absence of donor-imposed restrictions. Accordingly, net assets and changes therein are classified and reported as follows: Unrestricted net assets net assets that are not subject to donor-imposed stipulations. Unrestricted net assets may be designated for specific purposes by action of the board of directors. Temporarily restricted net assets net assets that are subject to donor-imposed stipulations that may or will be met by the occurrence of a specific event or the passage of time. Permanently restricted net assets net assets required to be maintained in perpetuity, due to donor-imposed restrictions. Generally, the donors of these assets permit the Association to use all or part of the income earned on related investments for general or specified purposes. (c) Cash Equivalents Cash equivalents consist of highly liquid investments with original maturities of three months or less. The Association has classified any cash or money market accounts held by external investment managers as investments as these funds are not intended for current operations. 8 (Continued)

10 (d) Investments and Related Income Investments primarily include assets invested for long-term capital appreciation, but also include short-term investments available for operations, totaling $151 million and $140 million as of June 30, 2018 and 2017, respectively. All investments are carried at fair value with the related gains and losses included in the statement of activities. The fair value of equity securities, debt securities, and mutual funds with readily determinable fair values approximates quoted market prices. Investments in real estate funds are determined by using the fund manager s net asset value (NAV), adjusted for cash flows. NAV per share is published by the manager and serves as the basis for current investor transactions. The fair value of real estate and other properties held as investments is estimated using private valuations of the properties held by the fund manager. For certain investments with limited marketability, the Association has adopted the concept of practical expedient, under which investments are stated at estimated fair value using net asset values as provided by the general partners and fund managers and as reviewed by management. These net asset values are based on underlying securities and holdings, which may be valued at quoted market prices, comparable investments, appraised values, or discounted cash flows. As a practical expedient to determine fair value, investments in fund of funds are reported using net asset values of the underlying funds as provided by the individual fund managers. The fund of funds manager reserves the right to adjust the reported net asset value if it is deemed not to be reflective of fair value. Because of the inherent uncertainty of valuations of investments in the underlying funds, their estimated values may differ significantly from the values that would have been used had a ready market for the underlying funds existed, and the difference could be material. Management relies upon the audited financial statements of the fund of funds performed by a third-party auditor. The fair value of investments in venture capital funds is determined by using the fund manager s provided NAV, adjusted for cash flows. Recent transactions from other investors, to the extent they are available, may also be used in determining fair value. Management relies upon the audited financial statement of the venture fund performed by a third-party auditor. Interest and dividend income is presented net of investment advisory/management fees and is reflected as net interest and dividends in the statement of activities. All investment income is reported as unrestricted unless otherwise restricted by the donor or required by accounting convention. All appreciation/depreciation earned on investments is reported as a change in unrestricted net assets unless otherwise restricted by the donor, applicable law, or accounting convention. (e) Contributions and Bequests All contributions are considered available for the general programs of the Association, unless specifically restricted by the donor. The Association reports monetary gifts as temporarily restricted support if they are received with donor stipulations that limit their use or are subject to time restrictions. A donor restriction expires when a stipulated time restriction ends or when a purpose restriction is accomplished. Upon expiration of the restriction, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. The Association is the beneficiary under various wills and trust agreements. Such amounts are recorded when a will is declared valid by a probate court and the proceeds are measurable. 9 (Continued)

11 The Association records unconditional promises to give that are expected to be collected within one year at net realizable value. Unconditional promises to give that are expected to be collected in more than one year are recorded at the present value of their estimated future cash flows. The discounts on those amounts are computed at the date of gift using risk-adjusted interest rates applicable to the years in which the promises are expected to be received, with rates ranging from 0.71% to 3.20%. Accretion of the discounts is recognized as contribution revenue using the effective-interest method. The Association recognizes conditional promises to give when the conditions stipulated by the donor are substantially met. A conditional promise to give is considered unconditional if the possibility that the condition will not be met is remote. (f) Research Awards and Grants The Association awards funds each year to support cardiovascular, stroke and related research projects. The projects generally extend over a period of one to five years. The liability and related expenses are recorded when the recipients are notified of their awards, and the liability is reported as research awards payable in the balance sheet. Awards that are expected to be paid in future years are recorded at the present value of their estimated future cash flows. The discounts on those amounts are computed at the date of award using interest rates applicable to the years in which awards are granted, ranging from 2.3% to 2.8%. Accretion of the discounts is recognized as research awards and grants expense, using the effective-interest method, in the statement of functional expenses. (g) Exchange Transactions and Deferred Revenue The Association records revenues from exchange transactions as increases in unrestricted net assets to the extent that the earnings process is complete. Resources received in exchange transactions are recognized as deferred revenue to the extent that the earnings process has not been completed. These transactions primarily include sales of educational materials, conferences, subscriptions, royalty revenues, licensing fees, and advertising fees from journal publications. Receivables from exchange transactions are expected to be collected within one year and are recorded at net realizable value. (h) Land, Buildings, and Equipment Donated property and equipment are recorded at fair value at date of receipt, and expenditures for land, buildings, and equipment are capitalized and stated at cost. Depreciation of buildings and equipment is provided on a half-year convention basis over estimated useful lives of the assets, ranging from 2 to 40 years (land leasehold length of the leasehold interest; building and improvements 5 to 40 years; and furniture and equipment 2 to 7 years). (i) Contributed Services and Materials The Association recognizes contributions of materials at their estimated fair value at date of donation. The Association reports gifts of land, buildings, equipment, and other nonmonetary contributions as unrestricted support unless explicit donor stipulations specify how the donated assets must be used. Gifts of long-lived assets with explicit restrictions that specify how and how long the assets are to be 10 (Continued)

12 used and gifts of cash or other assets that must be used to acquire long-lived assets are reported as temporarily restricted support. Absent explicit donor stipulations about how long those long-lived assets must be maintained, the Association reports expirations of donor restrictions when the donated or acquired long-lived assets are placed in service. Contributed materials reported in the statement of activities were allocated as follows in 2018 and 2017 (in thousands): Research $ 266 2,214 Public health education 22,414 39,429 Professional education 2,845 1,397 Community services Management and general Fundraising Total contributed materials $ 26,233 43,132 The Association recognizes contributions of services received if such services (a) create or enhance nonfinancial assets, or (b) require specialized skills, and are provided by individuals possessing those skills and would typically need to be purchased if not contributed. Contributed services reported in the statement of activities were allocated as follows in 2018 and 2017 (in thousands): Research $ 4,758 6,564 Public health education 1,505 1,332 Professional education 8,878 9,012 Management and general Fundraising Total contributed services $ 15,566 17,031 Public service announcements of approximately $19,490,000 and $38,940,000 were included in contributed materials revenue on the statement of activities and printing and publication on the statement of functional expenses for the years ended and 2017, respectively. In addition, the Association receives services from a large number of volunteers who give significant amounts of their time to the Association s programs, fundraising campaigns, and management. No amounts have been reflected for these types of donated services, as they do not meet the criteria for recognition. 11 (Continued)

13 (j) Net Assets Public support and other revenues received during the fiscal year are used to fund research awards, programs, and operations. A portion of unrestricted net assets is available for unfunded commitments, program supplementation, and operating contingencies directed by specific action of the board of directors and is reserved for the continuity of the Association s general activities and to meet emergency demands. (k) Functional Allocation of Expenses The costs of providing the various programs and supporting services are summarized on a functional basis in the statement of functional expenses. Certain costs are allocated among the program and supporting services benefited. (l) Income Taxes The Association is exempt from federal income taxes on related income under Section 501(a) of the Internal Revenue Code (IRC) of 1986, as amended, as an organization described in IRC Section 501(c)(3). Further, the Association has been classified as an organization that is not a private foundation under IRC Section 509(a) and, as such, contributions to the Association qualify for deduction as charitable contributions. However, income generated from activities unrelated to the Association s exempt purpose is subject to tax under IRC Section 511. The Association did not have a material unrelated business income tax liability for the years ended and The Association believes that it has taken no significant uncertain tax positions. (m) Fair Value of Financial Instruments The Association utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Association determines fair value based on assumptions that market participants would use in pricing an asset or a liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels (see note 3): Level 1 unadjusted quoted or published prices in active markets for identical assets or liabilities, such as publicly traded equity securities. Level 2 inputs other than quoted prices included in Level 1 that are observable, either directly or indirectly. Such inputs may include quoted prices for similar assets, observable inputs other than quoted prices (interest rates, yield curves, etc.), or inputs derived principally from or corroborated by observable market data by correlation or other means. Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. The inputs reflect the Association s assumptions based on the best information available in the circumstances. Inputs and valuation techniques used to measure fair value of Level 3 assets include reported fair value at the time of a gift, independent appraisals, published multiples of similar securities, or face value. At, less than 1% of investment values are based upon Level 3 inputs. Split-interest agreements and perpetual trusts are revalued annually based on investment statements provided by third-party trustees. 12 (Continued)

14 Inputs generally refer to the assumptions that market participants use to make valuation decisions. The inputs or methods used for valuing investments are not necessarily an indication of the risk associated with those investments. The valuation methodologies used may involve a significant degree of judgment. Because the Association is under no compulsion to dispose of its investments, the estimated values may not reflect amounts that could be realized upon immediate sale nor amounts that may ultimately be realized. For the fund of funds investment, which is valued at NAV, there were no gates or side pockets (that is, a portion of an underlying fund s portfolio segregated for purposes of allocating gains and losses) in place at. A credit manager did have a lock up provision in place at June 30 but the amount subject to the lock up is deemed to be immaterial. The Association held a venture capital investment at that invests in private start-up and emerging growth companies in healthcare sectors focusing on a broad set of clinical areas related to cardiovascular and stroke health. The investment is an illiquid, long-term investment for which no resale market, public or private, may develop. The Association has committed $10 million of which $9.5 million remains uncalled. Fair value is determined by using the fund manager s provided NAV as of March 31, 2018, adjusted for cash flows. Recent transactions from other investors, to the extent they are available, may also be used in determining fair value. Management relies upon the audited financial statement of the venture fund performed by a third-party auditor. In accordance with ASU , investments for which fair value is measured using net asset value have not been categorized within the fair value hierarchy. (n) Split-Interest Agreements The Association has received as contributions various types of split-interest agreements, including charitable gift annuities, pooled income funds, charitable remainder trusts, and perpetual trusts. Under charitable gift annuity arrangements, the Association has recorded the assets at fair value and the liabilities to the donor or his/her beneficiaries at the present value of the estimated future payments to be distributed by the Association to such individuals. The amount of the contribution is the difference between the asset and the liability and is recorded as unrestricted revenue, unless otherwise restricted by the donor. Under the pooled income fund and charitable remainder trust arrangements, the Association has recorded the contribution as temporarily restricted contribution revenue at the present value of the estimated future benefits to be received. Subsequent changes in fair value for charitable remainder trusts are recorded as changes in value of split-interest agreements in the temporarily restricted net asset class and are reported as changes in value of split-interest agreements in the statement of activities. The discount rates used for split-interest agreements at and 2017 were 3.2% and 2.9%, respectively. Under perpetual trust arrangements, the Association has recorded the asset and has recognized permanently restricted contribution revenue at the fair value of the Association s beneficial interest in the trust assets. Investments in oil and gas interests, which have a limited marketability, are stated at fair value, as estimated based on a multiple of annual revenues. Distributions received on the trust assets are recorded as unrestricted revenue in the statement of activities, unless otherwise restricted 13 (Continued)

15 by the donor. Subsequent changes in fair value of the beneficial interest in the trust assets are recorded as net unrealized gains or losses on beneficial interest in perpetual trusts in the permanently restricted net asset class. (o) Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the discounts for long-term receivables, research awards payables, and split-interest agreements, the useful lives of fixed assets, the collectability of receivables, the valuation of split-interest agreements, investments and perpetual trusts, the postretirement benefits liability, the allocation of joint costs, and the functionalization of expenses. (p) Summarized Comparative Totals The financial statements include certain prior year summarized comparative information that does not include sufficient detail to constitute a presentation in conformity with GAAP. Accordingly, such information should be read in conjunction with the Association s financial statements for the year ended June 30, 2017, from which the summarized information was derived. (q) Reclassifications Certain reclassifications of prior year have been made to conform to the current year presentation. Specifically, certain revenue amounts on the Statement of Activities have been reclassed. 14 (Continued)

16 (2) Investments Investments at and 2017 and related returns for the years then ended consisted of the following (in thousands): Interest and Realized dividends and unrealized (expenses) gains (losses) Fair value Equity securities $ 6,738 35, ,844 Governmental securities 1,085 (583) 101,030 Corporate bonds 1,834 (622) 81,848 Mortgage-backed securities 95 (86) 3,649 Other asset-backed securities 790 (424) 61,377 Fixed income mutual/commingled funds 768 (666) 63,672 Private funds 1,799 16,799 Fund of funds 2,610 68,371 Real estate and other ,455 Short-term investments 507 (227) 10,390 Unsettled trades and other receivables, net (54) 69 4,104 Venture Capital (16) 348 Investment expenses (2,260) Total $ 10,330 37, ,887 June 30, 2017 Interest and Realized dividends and unrealized (expenses) gains (losses) Fair value Equity securities $ 7,248 47, ,650 Governmental securities 835 (573) 68,917 Corporate bonds 1,372 (398) 80,591 Mortgage-backed securities 156 (110) 5,090 Other asset-backed securities 623 (285) 48,247 Fixed income mutual/commingled funds 839 1,427 66,236 Fund of funds 2,852 58,273 Real estate and other 1, ,042 Short-term investments ,678 Unsettled trades and other receivables, net ,311 Investment expenses (1,642) Total $ 11,097 51, , (Continued)

17 (3) Fair Value Measurements The following tables present information about the Association s assets that are measured at fair value on a recurring basis as of and 2017, and indicates the fair value hierarchy of the valuation techniques used to determine such fair value: Balance Fair value measurements at reporting June 30, date using Assets 2018 Level 1 Level 2 Level 3 1. Equity securities: a. Domestic stocks $ 227, ,430 b. International stocks 75,414 75, Debt securities: a. Governmental securities 101, ,030 b. Corporate bonds 81,848 81,848 c. Mortgage-backed securities 3,649 3,649 d. Other asset-backed securities 61,377 61, Fixed income mutual fund 22,535 22, Real estate and other 18,455 16,241 2, Venture Capital Short-term investments 10,390 3,112 7, Unsettled trades and other receivables, net 4,105 4, Investments reported at net asset value (NAV) (1): a. Fixed income commingled fund 41,136 b. Fund of Funds 68,371 c. Private fund 16,799 Total Investments $ 732, Split-interest agreements receivable, net of discount $ 70,837 70, Beneficial interest in perpetual trusts Split-interest agreements/perpetual trusts (leveled) 147, ,586 Liabilities $ 218, Gift annuity obligations $ 12,466 12,466 (1) Investments measured at NAV are presented in the table to allow for reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. 16 (Continued)

18 Balance Fair value measurements at reporting June 30, date using Assets 2017 Level 1 Level 2 Level 3 1. Equity securities: a. Domestic stocks $ 238, ,675 b. International stocks 80,076 80,076 c. Nonpublic corporations Debt securities: a. Governmental securities 68,917 68,917 b. Corporate bonds 80,591 80,591 c. Mortgage-backed securities 5,090 5,090 d. Other asset-backed securities 48,247 48, Fixed income mutual fund 23,513 23, Real estate and other 18,042 15,732 2, Short-term investments 63,678 10,544 53, Unsettled trades and other receivables, net 7,311 7, Investments reported at net asset value (NAV) (1): a. Fixed income commingled fund 42,723 b. Fund of Funds 58,273 Total Investments $ 736, Split-interest agreements receivable, net of discount $ 72,222 72, Beneficial interest in perpetual trusts Split-interest agreements/perpetual trusts (leveled) 141, ,918 Liabilities $ 214, Gift annuity obligations $ 12,288 12,288 (1) Investments measured at NAV are presented in the table to allow for reconciliation of the fair value hierarchy to the amounts presented in the statement of financial position. There were no transfers between Level 1 and Level 2 during fiscal years ended or (Continued)

19 The following summarizes the nature of investments that are reported at estimated fair value using net asset value as of (in thousands): Unfunded Redemption Redemption Fair value commitments frequency notice period Fund of funds $ 68,371 Various days Fixed income commingled fund 41,136 Weekly 3 days Private fund 16,799 Monthly 30 days The following summarizes the nature of investments that are reported at estimated fair value using net asset value as of June 30, 2017 (in thousands): Unfunded Redemption Redemption Fair value commitments frequency notice period Fund of funds $ 58,273 Various days Fixed income commingled fund 42,723 Weekly 3 days The fund of funds is a multi-strategy hedge fund investment whose strategies include, but are not limited to, hedged equity, global macro, commodity trading advisor, event driven, credit, and equity market neutral. Redemptions are allowed monthly, quarterly, and annually. Included in the fund of funds is a credit strategy, which includes a lock up provision. As of the amount subject to the lock up is deemed to be immaterial. The investment is commitment based and the unfunded commitment is held in cash within the fund of funds and managed by the fund of funds manager. As a result, this amount has not been reflected as an unfunded commitment in the table above for the period-ended. The full commitment (total of the funded and unfunded) to the credit strategy investment is also deemed to be immaterial. The commingled fixed income fund invests in obligations of varying maturities, including corporate bonds, asset-backed securities, and government and agency securities. The fund may also invest in noninvestment grade securities in addition to securities denominated in foreign currencies and foreign securities denominated in U.S. dollars. Redemptions are allowed weekly. As of, the Association was invested in a private fund, which invests primarily in equity securities of small and mid-size companies located outside of the United States. Redemptions are allowed monthly with 30 days notice. 18 (Continued)

20 The change in the fair value of the Association s assets and liabilities valued using significant unobservable inputs (Level 3) is shown below (in thousands): Split-interest Perpetual Gift annuity Investments agreements trusts obligations Balance June 30, 2016 $ 3,186 67, ,985 (12,878) Total net gains 48 7,656 4, Acquisitions (548) Settlements (24) (3,244) (105) 539 Balance June 30, ,210 72, ,918 (12,288) Total net (losses) gains (546) 5,286 5, Acquisitions (1,326) Settlements (302) (6,671) 657 Purchases 550 Sales (350) Balance $ 2,562 70, ,586 (12,466) The change in value of split-interest agreements valued using significant unobservable inputs is included in change in value of split-interest agreements financial statement caption in the accompanying statement of activities. The change in value of perpetual trusts using significant unobservable inputs is included in the net unrealized gains (losses) on beneficial interest in perpetual trusts financial statement caption in the accompanying statement of activities. The change in unrealized gains/(losses) relating to assets still held at the reporting date is approximately $9,545,000. The Association independently assesses the valuation for assets classified as Level 3. Unobservable inputs are internally developed for certain asset categories, including split-interest agreements. Split-interest agreements are valued on a discounted cash flow basis utilizing asset values reported by third party trustees and appropriate growth and discount factors. Gift annuity obligations are valued on a discounted cash flow basis using an applicable interest rate and life expectancy tables. 19 (Continued)

21 Quantitative information regarding unobservable inputs developed by the Association and assumptions used to measure the fair value of the related assets and liabilities of split-interest agreements and gift annuity obligations as of is as follows: Significant Valuation unobservable Range Type Fair value technique inputs (weighted average) (In thousands) Split-interest agreements $ 70,837 Discounted Growth rate/ 2.96% 3.48%* cash flow discount rate 3.20% Gift annuity obligations 12,466 Discounted Discount rate 1% 9.6% cash flow 3.4% * These percentages represent the low and high growth rate ranges plus a risk premium from July 1, The fair value of directly held real estate is based upon periodic third party valuations. Increases in the discount rate applied to the future anticipated cash flows from split-interest agreements would result in a lower estimated fair value. Conversely, decreases in the discount rate applied would result in a higher estimated fair value. However, the projected growth rate assumptions utilized by management are the same as the discount rate assumptions and, accordingly, the impact on the estimated fair value would be insignificant. Increases in the discount rate applied to the future anticipated payments associated with gift annuity obligations would result in a lower estimated fair value of the liability. Conversely, decreases in the discount rate applied would result in a higher estimated fair value of the liability. (4) Endowments The Association s endowment program consists of donor-restricted endowment funds, and does not include any funds designated by the Board of Directors to function as endowments. The endowment program is subject to the New York Prudent Management of Institutional Funds Act (NYPMIFA). Absent explicit donor stipulations to the contrary, the Association classifies the original value of gifts donated to the permanent endowment as well as accumulations to the permanent endowment made at the direction of the donor as permanently restricted net assets. The remaining portion of the donor-restricted endowment fund that is not classified in permanently restricted net assets is classified as temporarily restricted net assets until those amounts are appropriated for expenditure by the Association in a manner consistent with the standard of prudence prescribed by NYPMIFA. In accordance with NYPMIFA, the Association considers the following factors in making a determination to appropriate or accumulate donor-restricted endowment funds: 1. The duration and preservation of the endowment fund 2. The purposes of the Association and the donor-restricted endowment fund 20 (Continued)

22 3. General economic conditions 4. The possible effect of inflation or deflation 5. The expected total return from income and appreciation of investments 6. Other resources of the Association 7. Where appropriate and circumstances would otherwise warrant, alternatives to expenditure of the endowment fund, giving due consideration to the effect that such alternatives may have on the Association 8. The investment policy of the Association Changes in endowment net assets exclusive of beneficial interests in perpetual and other trusts for the years ended and 2017 are as follows (in thousands): Temporarily Permanently Unrestricted restricted restricted Total Endowment net assets, June 30, 2016 $ 12,745 44,861 57,606 Investment return: Investment income 1,018 1,018 Net appreciation 5,165 5,165 Contributions Appropriation for expenditure (2,076) (2,076) Endowment net assets, June 30, ,852 44,914 61,766 Investment return: Investment income Net appreciation 4,078 4,078 Contributions Reclassification and other (78) 78 Appropriation for expenditure (2,192) (2,192) Endowment net assets, $ 19,613 45,709 65,322 From time to time, the fair value of assets associated with an individual donor-restricted endowment fund may fall below the original value of the fund. If applicable, deficiencies of this nature are reported in unrestricted net assets. There were no deficiencies as of or June 30, The Association has adopted investment and spending policies for endowment assets that attempt to provide a predictable stream of funding to programs supported by its endowments while seeking to maintain the purchasing power of the endowment assets. Under these policies, as approved by the Board of Directors, the 21 (Continued)

23 endowment assets are invested in a manner that seeks to produce results that exceed the price and yield results of a mix of relevant benchmarks, while assuming a moderate level of investment risk. To satisfy its long-term rate-of-return objectives, the Association relies on a total return strategy in which investment returns are achieved through both capital appreciation (realized and unrealized) and current yield (interest and dividends). The Association targets a diversified asset allocation to achieve its long-term return objectives within prudent risk constraints. The Association has a policy of appropriating for distribution each year an amount not to exceed 4% of each endowment s average fair market value over the prior five years through the fiscal year-end preceding the fiscal year in which the distribution is planned. In establishing this policy, the Association considered the long-term expected return on its endowments, mentioned above. (5) Unconditional Promises As of and 2017, the Association has received unconditional promises to give, consisting primarily of pledges, split-interest agreements, and bequests, which are scheduled to be received as follows (in thousands): Less than one year $ 143, ,958 One to five years 156, ,110 More than five years 106, ,073 Subtotal 405, ,141 Allowance for uncollectible accounts (5,473) (4,633) Discount (41,395) (35,805) Total $ 359, ,703 The Association maintains an allowance for doubtful accounts for estimated credit losses resulting from collection risks, including the inability of donors to make required payments under contractual agreements. The allowance for doubtful accounts is reported as a reduction of receivables in the balance sheet. The adequacy of this allowance is determined by evaluating historical delinquency and write-off trends, specific known collection risks, historical payment trends, as well as current economic conditions. 22 (Continued)

24 (6) Land, Buildings, and Equipment At and 2017, land, buildings, and equipment, and the related accumulated depreciation and amortization were as follows (in thousands): Land and leasehold improvements $ 14,908 15,472 Buildings and improvements 72,450 74,510 Equipment and furniture 100,534 92,375 Total 187, ,357 Less accumulated depreciation and amortization (121,191) (114,870) Land, buildings, and equipment, net $ 66,701 67,487 (7) Leases (a) Operating Leases The Association has operating lease agreements for office space and equipment. Future annual minimum lease payments due under noncancelable leases as of are as follows (in thousands): 2019 $ 11, , , , ,869 Thereafter 15,007 Total $ 57,656 Total operating lease expense for the years ended and 2017 was approximately $12,435,000 and $11,297,000, respectively. 23 (Continued)

25 (b) Capital Leases The Association leases office equipment under capital lease agreements expiring on various dates through As of, the future minimum lease payments under capital leases were as follows (in thousands): 2019 $ Total 1,234 Less amount representing interest, support, and maintenance (72) Present value of lease obligation, included in other liabilities $ 1,162 (8) Retirement Plans The Association has a 401(a) defined-contribution plan (the Plan). Eligible participants include employees who are at least 21 years of age and have at least two years of service with an accumulation of at least 1,000 hours per year. A year of service is defined as a period of 12 consecutive months beginning on an employee s date of hire. Employees are 100% vested upon satisfaction of the eligibility period. Participants are not permitted to contribute to the Plan. The Association contributes to the Plan an amount equal to the following percentages of base salary, as defined by the Plan, depending upon the participant s years of service: Participant s years of service Contribution percentage 2 to 5 6 % Greater than 5 but less than or more 10 In addition, the Association contributes to the Plan an employer matching contribution, equal to 100% of each participant s elective contribution up to 4% of base salary to a 403(b) plan also sponsored by the Association. These elective contributions may be made by an employee beginning the first of the month following two years of service. Total retirement plan costs for the years ended and 2017 were approximately $23,820,000 and $22,750,000, respectively. 24 (Continued)

26 (9) Conflict of Interest Policy and Standards Included among the Association s officers, board, and committee members are volunteers from the business, medical, and scientific community who provide valuable assistance to the Association in the development of policies and programs and in the evaluation of research awards and grants and business relationships. The Association has adopted a conflict of interest policy and standards whereby volunteers are required to abstain from participating in or otherwise attempting to influence decisions in which they have a personal, professional, or business interest. (10) Allocation of Joint Costs The Association conducts joint activities (activities benefiting multiple programs and/or supporting services) that include fundraising appeals. Those activities primarily include direct mail campaigns and special events. The costs of conducting those joint activities were allocated as follows in 2018 and 2017 (in thousands): Public health education $ 149, ,123 Professional education and training 2,523 2,361 Community services 1,386 1,250 Management and general 22,535 25,159 Fundraising 56,802 53,221 Total joint costs $ 233, ,114 (11) Research Awards Payable The activity in research awards payable during the years ended and 2017 and the amounts payable by year are summarized below (in thousands): Beginning balance, July 1 $ 339, ,573 Awards expense: New awards 175, ,651 Cancellations, declinations, and refunds (12,840) (19,415) Research awards expense before discount 162, ,236 Change in discount (3,200) (1,811) Total research awards expense 159, ,425 Payments (158,605) (134,015) Ending balance, June 30 $ 340, , (Continued)

27 Payable in year ending June 30: 2019 $ 157, , , , ,675 Thereafter 99 Total 349,001 Less unamortized discount (8,470) Net research awards payable $ 340,531 (12) Postretirement Benefits The Association provides postretirement benefits to eligible past and present employees. Eligibility includes those who have retired or will retire at age 55 or thereafter, and who have been employed by the Association for at least 10 years of service prior to retirement. The Association provides eligible employees who retire prior to age 65 with medical, dental, and life insurance. Dental and life insurance terminate at age 65. During fiscal year 2009, eligibility requirements for the postretirement benefit plan were amended. As of the March 1, 2009 effective date, present employees (a) who had at least 10 years of continuous service with the Association or (b) whose age and years of continuous service with the Association summed to at least 50, maintained their eligibility. As of the March 1, 2009 effective date, present employees who did not meet either of these eligibility requirements may still participate in the plan upon retirement prior to age 65, but will be responsible for 100% of the cost. New employees joining the Association after March 1, 2009 are not eligible for postretirement benefits. 26 (Continued)